Retirement May Be Mission Impossible for Gen X

Jessica Rao,|Special to CNBC.com

Friday, 13 Apr 2012 | 2:56 PM ETCNBC.com

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As kids, they sat on gas lines in the backs of their parents’ cars. As young adults, they saw the stock market crash, and when it finally came time to settle down, they bought a house at the peak of the housing bubble and then were faced with the worst economy since the Great Depression. It’s no shock that Generation X — those born from 1965 to 1981 — may get short changed in their golden years.

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Though they’ve watched parents and grandparents nestled with pensions, Social Security and strong economic growth, these are no longer guarantees. On the other hand, longer life spans with more medical bills and greater need for cash are the reality for many.

Gen X is the first generation to deal with the fact that the models of American retirement are changing — and its members are flustered. The generation once called “slackers” has been true to form with retirement planning.

“Gen X is a transition generation,” says Carol O’Rourke, a certified financial planner and Executive Director for the Coalition for Debtor Educationin New York City. “Gen Xers were young during the tech bubble, and when they came of age, housing was a lot more expensive. With all the talk about whether Social Security is going to survive, there is a sense of not having something to look forward to.”

According to a 2012 Insured Retirement Institute , IRI, report, only one-third of Gen Xers are "very confident" about having enough money to live comfortably during retirement, cover their medical expenses, and pay for their children’s higher education.

Just 41 percent of the group have tried to figure out how much money they will ultimately need to save for retirement, and among those who have saved, half have amassed less than $100,000.

“Even though they have a longer time horizon toward retirement, there has been a tremendous emotional impact on their confidence in the future. What are they going to do to be sure that they have enough?” adds Cathy Weatherford, IRI president and CEO.

“Many of the institutions that they were taught as children didn’t play out, whether it was political or social or economic. They just kind of unraveled for a variety of reasons,” says Wendover.

With the complexity of financial products on the market, Xers are not investing like other generations because they can’t find advice, say experts.

O’Rourke points out that, “while you used to be able to start small, private banks these days are looking for large clients and you need something like $250,000 to open an account.” Though Xers might be comfortable with online banking, they're not the type to invest in the Internet.

Gen Xers have been burned and are more hesitant, agrees Shalyn Courtenay, a Senior Associate at a Cambium, a full service financial advisory firm in Purchase, NY. In some cases, Courtenay encourages clients to put money in the stock market, but frequently suggests annuity products and cash value whole life insurance that provide guarantees.

The IRI study also revealedthat during the recession, 15 percent of Xers made early withdrawals from their 401(k) plans, 23 percent stopped contributing to their retirement accounts, and 22 percent stopped contributing to college savings plans.

“The leakage out of their 401(k)s to meet current needs is what is most worrisome,” adds Weatherford.

No House Money

“Tapping into retirement accounts is expensive,” agrees Courtenay, who is quick to remind clients that everyone should have emergency liquid funds, such as a money market account.

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On the job front, Xers may not be in the executive level jobs that they hoped for because the Baby Boomers are working longer.

“It delays the natural promotion and succession process within in many firms,” Wendover points out.

The X gang is also the first generation to have worked for multiple employers and is likely to have between three and six 401(k)s. Courtenay encourages Xers “to roll them in one well-managed, well-diversified account.”

Employers are also providing less retirement support. According to the Bureau of Labor Statistics, in 1981, 84 percent of all U.S. workers in the private sector had access to defined benefit pension plans. In March of 2011. the number was down to 20 percent.

Unlike Boomers, many of whom have profited nicely from two-plus decades of housing-price appreciate and can think of their home as a cash cow, Xers may be the first generation since the one of the Great Depression to not realize gains in wealth.

Home ownership in the X demographic is also down. The Census Bureau reportsthat in the first quarter of 2005, 70 percent of older Xers (ages 35 to 44) owned homes. In the fourth quarter of 2011, it had fallen to 62 percent. Among younger Xers (under 35), it dropped from 43 to 38 percent in the same time period.

The elephant in the room, however, is Social Security . An American institution since the 1930s, there will almost certainly be modifications that will apply to the X generation, say experts.

It’s possible that SSI benefits will be taxed more heavily, particularly for upper-income earners. Younger people will probably have to pay more inMedicare , and because of stress to the system, it is almost a foregone conclusion that the retirement age will gradually be lifted for those under 55.

“One of the biggest mistakes that people make when planning for retirement is they underestimate health and long-term care costs,” says AARP's VPfor Financial Security Jean Setzfand.

According to a February 2012 AARP report, half of all Medicare beneficiaries pay at least $3,138 in out-of-pocket costs, amounting to 17 percent of their income. Nearly two-thirds of Americans 65 and older will need long-term care at home, through adult day health care or in an assisted-living facility.

The IRI report cited 64 as the average age at which Xers thought they’d retire. A longer horizon for sure, but if they don’t step it up, Gen X may be in the trenches a lot longer.